Continental pushes ahead with pitches for auto spinoff

LONDON: Continental AG is pushing ahead with preparations for a separation of its struggling car parts business, even as it grapples with recalls related to faulty braking systems it supplied, according to people familiar with the matter.

The German company has invited investment banks to pitch for a role on the planned spinoff of the automotive business, the people said.

While the request for proposals was sent earlier this month, pitches are still proceeding after the recall announcement, according to the people, who asked not to be identified because the information is private.

Shares of Continental plunged last week after BMW AG disclosed the spiraling cost of a recall affecting 1.5 million vehicles due to faults with their Continental braking systems.

The system fault is expected to cost BMW nearly €1 billion to fix. A spokesperson for Continental has said they currently expect the cost of the brakes issue to be in the mid-double digit millions of euros.

Continental’s automotive business could be valued at about €4.3 billion based on a sum-of-the-parts analysis, according to Bloomberg Intelligence.

Once listed, it could be compared to other publicly-traded car parts makers such as Denso Corp., Aptiv Plc and Forvia SE, one of the people said.

While Continental is continuing preparations for the spinoff, it could end up pushing back the timeline for the start of trading, some of the people said.

It may need to better quantify the impact of the recall before it can finish the formalities of separating the automotive business from the rest of the group, according to the people.

Continental said last month it’s considering a spinoff and listing of the automotive unit in what could be the biggest restructuring in its 150-plus year history.

Continental shareholders would receive stock in an independently listed entity with no new money raised. The company has said it will make a decision in the fourth quarter of this year, with a listing targeted by the end of 2025.

The automotive business - which employs around 100,000 people and generated sales of around €20.3 billion in the past fiscal year - has been struggling with significant investment requirements and waning demand.

Higher interest rates are weighing on car buying, and auto sales remain below expectations in China, where German brands are struggling to keep up with local competition led by BYD Co.

Deliberations are ongoing and details of the spinoff could still change, the people said.

A spokesperson for Continental said preparations for the spinoff are already under way as it targets an MDAX listing for the unit.

Continental is confident it will be able to achieve preconditions for the spinoff, including having strong underlying operations with a viable standalone business case, according to the spokesperson.